The Debt Ceiling: This is getting ridiculous

Be that as it may, the lost productivity, revenue and innovation is, for all intents and purposes, forever lost. When a business or economy loses resources, even if the resources' impotence is short-lived, very few of them recover and outstrip their prior performance to the extent that the loss is made up for.

Google AdSenseGuest Advertisement

so the cost of increased ocean temperatures by merely 1 degree C when it comes to evaporation, atmospheric mass, extreme weather events will inevitably force the world to change the way it does business.. without doubt....

Google AdSenseGuest Advertisement

Here is the thing, the US government can spend as much money as necessary. It has unlimited ability to spend money. Unlike you and me, the federal government can print as much money as it needs. It can handle any thing short of a cataclysmic species ending event providing it acts appropriately. With Republicans in control of Washington, that may not always be the case. I'm no supporter of Trump, but he does have people around him who know the score, and given his concern with raising the debt ceiling, I think he gets it. Congressional Republicans on the other hand probably don't.

the US government can spend as much money as necessary. It has unlimited ability to spend money.

Click to expand...

It is not unlimited. It's just very high.

The U.S. government can only borrow to the extent that potential creditors believe the U.S. government will not default on its debt. At the moment, the U.S. government collects about $1.2T in tax revenue, so theoretically, it could spend most of that (a portion of that is already obligated to certain mandatory expenditures -- see the chart in the OP) on interest payments and nothing else. Currently, the interest on U.S. debt is somewhere around $250B to $300B and we carry something on the order of $20T in debt. So while the U.S. can borrow a lot more, its borrowing ability is not unlimited.

Yes, mechanically, we can do that. The instant we do so would also be the instant we could borrow no more. Nobody wants to loan money to a nation that devalues it currency by printing money to pay its debts.

So, yes, we could print money, pay the debt, and our creditors would have little choice but to accept the money we printed and gave them. What they don't have to do, however, is ever again loan us money or accept our currency. There's reason the USD is one of the principal exchange currencies.

Google AdSenseGuest Advertisement

The U.S. government can only borrow to the extent that potential creditors believe the U.S. government will not default on its debt. At the moment, the U.S. government collects about $1.2T in tax revenue, so theoretically, it could spend most of that (a portion of that is already obligated to certain mandatory expenditures -- see the chart in the OP) on interest payments and nothing else. Currently, the interest on U.S. debt is somewhere around $250B to $300B and we carry something on the order of $20T in debt. So while the U.S. can borrow a lot more, its borrowing ability is not unlimited.

Click to expand...

Correction:

The "mess" of text that is in the first part of post 23 should read as follows:

"The U.S. government can only borrow to the extent that potential creditors believe the U.S. government will not default on its debt. At the moment, the U.S. government collects about $1.2T in tax revenue, so theoretically, it could spend most of that (a portion of that is already obligated to certain mandatory expenditures -- see the chart in the OP) on interest payments and nothing else. Currently, the interest on U.S. debt is somewhere around $250B to $300B and we carry something on the order of $20T in debt. So while the U.S. can borrow a lot more, its borrowing ability is not unlimited."
​

Why it looks a mess in that post and not in this one is anybody's guess.

The "mess" of text that is in the first part of post 23 should read as follows:

"The U.S. government can only borrow to the extent that potential creditors believe the U.S. government will not default on its debt. At the moment, the U.S. government collects about $1.2T in tax revenue, so theoretically, it could spend most of that (a portion of that is already obligated to certain mandatory expenditures -- see the chart in the OP) on interest payments and nothing else. Currently, the interest on U.S. debt is somewhere around $250B to $300B and we carry something on the order of $20T in debt. So while the U.S. can borrow a lot more, its borrowing ability is not unlimited."
​

Why it looks a mess in that post and not in this one is anybody's guess.

Well, never mind....it's a mess here too.

Click to expand...

the dollar signs you use are also code. remove the /$ sign or put a / before it I think...

The U.S. government can only borrow to the extent that potential creditors believe the U.S. government will not default on its debt. At the moment, the U.S. government collects about $1.2T in tax revenue, so theoretically, it could spend most of that (a portion of that is already obligated to certain mandatory expenditures -- see the chart in the OP) on interest payments and nothing else. Currently, the interest on U.S. debt is somewhere around $250B to $300B and we carry something on the order of $20T in debt. So while the U.S. can borrow a lot more, its borrowing ability is not unlimited.

Click to expand...

Well, this is your first mistake. It is unlimited. The United States can spend unlimited funds and never default, because as I previously said, it can create unlimited sums of money. That’s a very simple fact. Now the wisdom of doing so is another matter.

Two, the 20 trillion debt number you reported for the US is a bit overstated because it includes money the US government owes to itself and a debt you owe to yourself isn’t really debt. But owning to the accounting method used, i.e. fund accounting, the US government reports debt it owes to itself as debt. The real debt, it about 12 trillion dollars.

Yes, mechanically, we can do that. The instant we do so would also be the instant we could borrow no more. Nobody wants to loan money to a nation that devalues it currency by printing money to pay its debts.

Click to expand...

And you have just contradicted yourself. The US federal government has the ability to create unlimited sums of money. It is a simple fact. The wisdom of doing so depends upon a number of circumstances. And that wisdom is a bit more complicated than I think you understand. Additionally, borrowing money doesn't expand the money supply. You are confusing fiscal policy with monetary policy. Furthermore countries routinely devalue their currencies because it gives them a competitive advantage in international trade and it doesn't affect their ability to borrow money. What investors don't want is uncertainty. Inflation expectations is built into the interest rate. If investors expect high inflation, that expectation will be built into the interest rate, i.e. priced into the value of the debt. http://www.businessinsider.com/why-trump-favors-a-weak-dollar-2017-1

So, yes, we could print money, pay the debt, and our creditors would have little choice but to accept the money we printed and gave them. What they don't have to do, however, is ever again loan us money or accept our currency. There's reason the USD is one of the principal exchange currencies.

Fixed LaTeX formatting - Kittamaru

Click to expand...

Yeah, as I said before, money supply is more complicated than you understand. If expanding the money supply always caused inflation as you assert, then how do you explain the last nearly 9 years when the US expanded the money supply to the tune of trillions of dollars without any appreciable inflation? That’s because money supply is a bit more complicated. Expanding the money supply doesn’t always equate to inflation as evidenced by the last 9 years. You’ve reiterated a common misperception. Most people think that printing more money is synonymous with inflation, and it isn’t. And one more thing, money supply is dynamic, meaning it changes over time. That’s why we have an institution dedicated to managing the money supply. That institution expands and contracts the money supply as needed. Just because the government increases the money supply today, it doesn’t mean it can’t remove that money tomorrow or a month from now or a year from now or 10 years from now.

So the bottom line here is you are confusing the ability with the wisdom. Sometimes it is wise to expand the money supply, e.g. 2008 – 2015. Sometimes it isn’t. But that doesn’t take away the fact the US government has the ability to print unlimited sums of money.

From a layman's perspective there is only one thing one needs to keep in mind.
Insurance companies are there to make a profit and like all companies when they do not believe they can turn a profit on a product they stop offering that product.
Now if I am not mistaken, and I probably are, most financial lending, borrowings, mortgages etc requires insurance against such disasters like fire flood and tempest, loss of income etc. and if these products are not available or are way too expensive to purchase then what happens to the finance industry, the end consumer and so on.. etc....

Click to expand...

Insurance companies don't always discontinue a line when it becomes unprofitable. They raise insurance rates. That's the beauty of the insurance industry. People need insurance. Ultimately in your scenario, higher insurance premiums would drive up the cost of homeownership which would drive down home prices.

Be that as it may, the lost productivity, revenue and innovation is, for all intents and purposes, forever lost. When a business or economy loses resources, even if the resources' impotence is short-lived, very few of them recover and outstrip their prior performance to the extent that the loss is made up for. Quite simply, very few organizations, economies and individuals rebound on the scale that, say, Apple did.

Click to expand...

As I previously wrote, there will be a short term localized economic downturn of a few days to perhaps a few weeks owing to lost productivity. But that loss would be overwhelmed by the by the billions of dollars spent in reconstruction. Now that said, not everyone will feel the impact equally. Cruise lines for example, unless they have business continuation insurance, will not recover their losses. People without home insurance will not recover their losses. Some wage earners may not be able to recover their lost wages. But in aggregate, the billions of dollars spent on reconstruction will dwarf the money lost owing to the hurricane. On aggregate these disasters aren't significant. If we didn't invest in reconstruction, it would be an entirely different matter.

As I previously wrote, there will be a short term localized economic downturn of a few days to perhaps a few weeks owing to lost productivity. But that loss would be overwhelmed by the by the billions of dollars spent in reconstruction. Now that said, not everyone will feel the impact equally. Cruise lines for example, unless they have business continuation insurance, will not recover their losses. People without home insurance will not recover their losses. Some wage earners may not be able to recover their lost wages. But in aggregate, the billions of dollars spent on reconstruction will dwarf the money lost owing to the hurricane. On aggregate these disasters aren't significant. If we didn't invest in reconstruction, it would be an entirely different matter.

Click to expand...

As I say each time I post:

When pontificating and sharing your analysis, providing citations that point readers to your underlying research will help convince them that you have thought seriously about the matter under discussion.
- Thomas G. Krattenmaker​

When pontificating and sharing your analysis, providing citations that point readers to your underlying research will help convince them that you have thought seriously about the matter under discussion.
- Thomas G. Krattenmaker​

"This rebuilding activity usually generates both increased sales tax receipts and additional employment. Thus, one ironic feature of a disaster is that it spurs the pace of economic activity in the affected region. An additional positive effect occurs as the economy's destroyed physical assets are replaced with assets that incorporate more advanced technology. By enhancing the productivity of a community's physical assets, incomes will typically be enhanced as well." - Saint Louis Federal Reserve, 'The Economics of Natural Disasters", April 1994

"This rebuilding activity usually generates both increased sales tax receipts and additional employment. Thus, one ironic feature of a disaster is that it spurs the pace of economic activity in the affected region. An additional positive effect occurs as the economy's destroyed physical assets are replaced with assets that incorporate more advanced technology. By enhancing the productivity of a community's physical assets, incomes will typically be enhanced as well." - Saint Louis Federal Reserve, 'The Economics of Natural Disasters", April 1994

The United States can spend unlimited funds and never default, because ... it can create unlimited sums of money.

Click to expand...

From that statement, I take exception as follows:

The U.S. does not have unlimited ability to spend money. I take exception with your statement because the limit of spending isn't defined by how much money a nation can print. Rather it's defined by others' willingness to accept a given currency as payment.

There is no denying that the U.S. can print money arbitrarily and at will. In the wake of doing so, existing holders of U.S. debt that contractually calls for payment in USD must accept those USDs.

At some point after having printed money to pay debt, ie., at some degree of the currency's devaluation, would-be lenders will refuse to accept the printed currency as payment. They refuse to accept the money because they observe that the nation prints money to pay debts and they know that doing so devalues the printed currency and they are unwilling to accept the risk that such a nation might simply print money to pay them, thereby leaving them with money that is worth less than they deem acceptable.

When would-be lenders refuse to accept the printed currency, the fact that one can print the currency is of no use. Quite simply, one cannot spend money others refuse to accept as payment. Thus, the point at which a nation has printed enough money that lenders will not accept it defines the ultimate limit of a government's spending ability. Can I, for the U.S., quantify that limit? No. But I don't need to quantify it to know that the limit exists and that it is not infinity. ​

there will be a short term localized economic downturn of a few days to perhaps a few weeks owing to lost productivity. But that loss would be overwhelmed by the by the billions of dollars spent in reconstruction....in aggregate, the billions of dollars spent on reconstruction will dwarf the money lost owing to the hurricane. On aggregate these disasters aren't significant.

Click to expand...

You supported the emboldened assertion by citing the St. Louis Fed's 1994 statement:

"This rebuilding activity usually generates both increased sales tax receipts and additional employment. Thus, one ironic feature of a disaster is that it spurs the pace of economic activity in the affected region. An additional positive effect occurs as the economy's destroyed physical assets are replaced with assets that incorporate more advanced technology. By enhancing the productivity of a community's physical assets, incomes will typically be enhanced as well." - Saint Louis Federal Reserve, 'The Economics of Natural Disasters", April 1994

Click to expand...

I hadn't directly addressed the emboldened point, but I here do.

In "Do natural disasters promote long-run growth?" (2002 -- summarized here ), Skidmore and Toya show that "climatic disasters have more significant and positive impact on [long run] growth rate." They hypothesize that this growth is due to capital stock accumulation, human capital accumulation, or improvements in technological capacity. The hypothesis comes from a simple growth framework in which they specify a Cobb-Douglas production function and then differentiate it via f''(x)/f(x) = g'(x)/g(x) + c'(x)/c(x) obtain a growth function.

"Plugging and chugging," the researchers found that long-run growth rates may be affected as newer and more productive technologies replace outdated ones. Despite the destruction of capital, disasters increase the return to human capital relative to investment capital and increase total factor productivity through the adoption of newer and more productive technologies. In other words, individuals earn good money in comparison to their pre-disaster earnings (duh, right....there's an increase in demand for labor to clean-up the mess and replace destroyed capital), and to the extent that a climatic disaster, in this case a hurricane, clobbers increasingly more out of date, obsolete, inefficient capital (equipment and facilities), using the new capital results in higher post-disaster output/productivity than was obtained before the disaster.

You and I will surely agree that Skidmore and Toya's findings corroborate the St. Louis Fed's statement you shared. What neither Skidmore and Toya nor the St. Louis Fed establish, or establish as probable, is that the disaster loss is "overwhelmed" by the post-disaster increases in productivity/profitability and returns to labor. That neither show that is why I take exception with your assertion.

Above the 99th percentile cutoff, "ten years after the disaster, the GDP per capita of the affected countries is (on average) 10 percent lower than it was at the time of the disaster, whereas it would be about 18 percent higher in the counterfactual scenario in which the disaster did not occur."

At the 90th percentile cutoff, the researchers did not "find any effect of disasters on output. Actual and counterfactual GDP per capita follow each other closely, not only before but also after the occurrence of the disaster. Whatever slight difference we find between them, it is not statistically significant at conventional levels."

Given the findings you and I have shared, it seems to me that most accurately stated, natural disasters can and may have a positive or negative impact on a nation's/region's post-disaster output, but whether it does/will is not by any means a foregone conclusion. That your statements present the matter as though "overwhelming" positive post-disaster output is a fact rather than a possibility is the other reason I do not agree with your assertion.

Note:

Cavallo et al a "disaster would be large when its magnitude exceeds 2 standard deviations [of lives lost] above the world mean." The authors recognize all the same that "large" can be relative, that is, "large" for China, say, may or may not be "large" for another nation. Cavallo et al thus explain why they use deaths as the r disaster magnitude variable. Several reasons why are really obvious: it's consistent, measurable, meaningful, material, scalable and precise regardless of where a disaster strikes.

The U.S. does not have unlimited ability to spend money. I take exception with your statement because the limit of spending isn't defined by how much money a nation can print. Rather it's defined by others' willingness to accept a given currency as payment.

There is no denying that the U.S. can print money arbitrarily and at will. In the wake of doing so, existing holders of U.S. debt that contractually calls for payment in USD must accept those USDs.

At some point after having printed money to pay debt, ie., at some degree of the currency's devaluation, would-be lenders will refuse to accept the printed currency as payment. They refuse to accept the money because they observe that the nation prints money to pay debts and they know that doing so devalues the printed currency and they are unwilling to accept the risk that such a nation might simply print money to pay them, thereby leaving them with money that is worth less than they deem acceptable.

Click to expand...

The US government does have unlimited ability to create money, assuming it has the political will to do so. As previously pointed out, the degree to which monetary expansion, i.e. creating money, affects the economy is dependent upon a number of economic factors. Creating and spending money doesn’t always devalue the currency, i.e. cause inflation, as evidenced by the last 9 years when the Federal Reserve created trillions of additional dollars. You cannot make these blanket statements that are always true, because they are not. You are repeating a very common misunderstanding.

Inflation isn’t caused by simply creating money. It’s caused when too much money is chasing too few goods and services. Governments can create all the money they want without causing any inflation providing there are no supply constraints. People like you get the first part, and ignore or forget the second part. That’s why the US was able to create trillions of additional dollars over the course of the last 9 years with essentially no inflation.

Two, you keep conflating debt with money supply. The two are not the same. The two are completely different. Interest rates are determined not by the amount of debt or the size of the money supply (i.e. how much money the government has created) but by inflationary expectations, default risk, maturity risk, and the profit investors expect i.e. the cost of money.

When would-be lenders refuse to accept the printed currency, the fact that one can print the currency is of no use. Quite simply, one cannot spend money others refuse to accept as payment. Thus, the point at which a nation has printed enough money that lenders will not accept it defines the ultimate limit of a government's spending ability. Can I, for the U.S., quantify that limit? No. But I don't need to quantify it to know that the limit exists and that it is not infinity.

Click to expand...

There is simply no evidence for your assertion. Furthermore, you are conflating personal finances with state finances. The two are not the same. Apparently, you don’t understand how debt issuance works. Let me explain it. When the US government issues debt, it doesn’t fill out a credit application as you would. It issues bonds. Those bonds are IOUs. They are sold at auction. Buyers, bid on them as they would bid on a house, or a car or anything else. Buyers/i.e. lenders, will buy US debt, at a discount, par or a premium. Lenders don’t refuse to buy simply because the inflation rate is high. Back in the 70s-80’s when inflation hit 14%, the 10-year Treasury rate was 15.3%. Today the 10-year Treasury interest rate is 2.29% and the money supply is 5 times what is was in the 1980. Your assertion just isn’t borne out by the data. As I have told you multiple times now, inflationary expectations are built into the price of the bond.

The value of US debt resides not in its money supply, but in its economy and in the stability of its government. That’s why bond investors buy US debt. It has nothing to do with the US money supply. Any inflationary expectations are baked into the price paid for US debt. If inflationary expectations are high, ceteris paribis, then bond prices will be lower and yields will be higher.

You supported the emboldened assertion by citing the St. Louis Fed's 1994 statement:

I hadn't directly addressed the emboldened point, but I here do.

In "Do natural disasters promote long-run growth?" (2002 -- summarized here ), Skidmore and Toya show that "climatic disasters have more significant and positive impact on [long run] growth rate." They hypothesize that this growth is due to capital stock accumulation, human capital accumulation, or improvements in technological capacity. The hypothesis comes from a simple growth framework in which they specify a Cobb-Douglas production function and then differentiate it via f''(x)/f(x) = g'(x)/g(x) + c'(x)/c(x) obtain a growth function.

"Plugging and chugging," the researchers found that long-run growth rates may be affected as newer and more productive technologies replace outdated ones. Despite the destruction of capital, disasters increase the return to human capital relative to investment capital and increase total factor productivity through the adoption of newer and more productive technologies. In other words, individuals earn good money in comparison to their pre-disaster earnings (duh, right....there's an increase in demand for labor to clean-up the mess and replace destroyed capital), and to the extent that a climatic disaster, in this case a hurricane, clobbers increasingly more out of date, obsolete, inefficient capital (equipment and facilities), using the new capital results in higher post-disaster output/productivity than was obtained before the disaster.

You and I will surely agree that Skidmore and Toya's findings corroborate the St. Louis Fed's statement you shared. What neither Skidmore and Toya nor the St. Louis Fed establish, or establish as probable, is that the disaster loss is "overwhelmed" by the post-disaster increases in productivity/profitability and returns to labor. That neither show that is why I take exception with your assertion.

Above the 99th percentile cutoff, "ten years after the disaster, the GDP per capita of the affected countries is (on average) 10 percent lower than it was at the time of the disaster, whereas it would be about 18 percent higher in the counterfactual scenario in which the disaster did not occur."

At the 90th percentile cutoff, the researchers did not "find any effect of disasters on output. Actual and counterfactual GDP per capita follow each other closely, not only before but also after the occurrence of the disaster. Whatever slight difference we find between them, it is not statistically significant at conventional levels."

Click to expand...

You are being more than a little pedantic don’t you think? The fact is natural disasters aren’t significant macroeconomic events for the reasons previously given. Is it possible the system will not work the way it was intended someday, sure. But I see no evidence of that. I don’t think a red state Congress is going to deny red states disaster relief. Furthermore, we aren’t talking China here. We are talking about the United States. The two are not the same. So, to equate the two is either stupid or intellectually dishonest.

Insurance companies don't always discontinue a line when it becomes unprofitable. They raise insurance rates. That's the beauty of the insurance industry. People need insurance. Ultimately in your scenario, higher insurance premiums would drive up the cost of home ownership which would drive down home prices.

Click to expand...

may be so... however if the risk becomes close to 100% then no increase in premium is going to work out it is?
Like granting flood insurance for land at the bottom of a coastal bay under 10 meters of water.

There is a point where the very notion of insurance fails and that is the point that I am referring to. If >CAT 5 hurricanes land fall happens in the Gulf of Mexico region on an annual basis with billions/trillions of dollars worth of destruction every year I am quite sure the insurers will eventually seek another line of income...
There are literally thousands of articles on the subject of climate change and financial loss so I wont bother quoting them here...and simply printing money or working on the basis that climate change will provide an economic stimulus doesn't do it for me..as both are ultimately delusional.

It is when insurers refuse to offer insurance that we know we are in really deep sh*t, and I am sure they are seriously considering their options for Houston, Florida etc right now...

"Wonders what storm and tempest insurance would be costing for a building in Haiti right now?"

As an aside it appears that vehicle insurance in Houston is more of a problem than building insurance...